How Bankruptcy Helps Your Debt Issues
The entire goal of claiming personal bankruptcy is to get debt relief when your debt reaches a point where you will never pay it off on your own.
The good news is bankruptcy eliminates almost all unsecured debts, including credit card debts, lines of credit, payday loans, bank loans, installment loans, and tax debts.
However, declaring bankruptcy doesn’t wipe clean all your debts. What happens when you apply for bankruptcy in Canada depends on the types of debt you have.
What does it mean to have debts discharged?
By definition, a bankruptcy discharge is a legal court document that officially and permanently eliminates your unsecured debts. However, and more importantly, discharge of your debts is the beginning of your fresh financial start.
Having your debts discharged means you are legally released from all debts covered under your bankruptcy. This means you no longer have to repay those debts.
What happens to the debts?
When you file bankruptcy, you receive a stay of protection from creditors. Declaring bankruptcy means debt collectors can no longer pursue you to collect. Creditors can no longer garnish your wages or sue you in court. However, your debts are still there until your bankruptcy is completed.
Once you successfully finish your bankruptcy, this is when your debts are released. Your creditors receive their share of any assets assigned in your bankruptcy and monies from your monthly bankruptcy payments, in exchange for which they agree to forgive the remainder of your debts. Your bankruptcy discharge is the final stage of this arrangement.
However, you should know that not all debts are erased in bankruptcy.
How does bankruptcy work when you have student loans? Or a mortgage? Or a mountain of credit card debt? Keep reading to learn more about how the bankruptcy process treats each type of debt.
Debts Eliminated by Bankruptcy Discharge
Bankruptcy covers almost all unsecured credit and debt. Unsecured debts are those that are not tied to property or collateral.
Dischargeable debts in a bankruptcy in Canada include:
- credit card debt,
- retail store cards and accounts,
- personal loans,
- installment loans,
- bank loans,
- unsecured lines of credit,
- finance company loans,
- payday loans,
- past due bills,
- loans from individuals,
- judgement debts from lawsuits,
- overdue tax debts and
- certain student loans.
The debts that are included in your bankruptcy are those that you owe or are due as of the date of your bankruptcy filing. Bankruptcy also covers penalties and interest owing associated with each of your listed debts.
Bankruptcy is a legal process created to give the honest but unfortunate debtor relief from their debts. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos & Associates and today I’m going to explain what kinds of debts can be discharged or eliminated when you file bankruptcy in Canada.
Bankruptcy in Canada deals with unsecured debts. Unlike a mortgage or car loan, which are secured by an asset, an unsecured debt is money you owe that isn’t secured by anything. Common unsecured debts you can eliminate through bankruptcy include balances owing on your credit cards; any unsecured instalment loans you might have from a bank, credit union or finance company; past due bills like cell phone bills or gym memberships where you’re no longer using the service; and even accounts that may have been sent to collections.
You can file bankruptcy for PayDay loans, personal loans, amounts you owe if you got sued by a lender. Even tax debts can be included in a bankruptcy. But, not every debt goes away in a bankruptcy. Government student loans are a special case. They can only be automatically discharged by a bankruptcy in Canada if you have been out of school for seven years.
There are a few debts you will still have to pay even after your bankruptcy. You’ll still be required to keep up all payments on secured debts for assets you plan to keep, like payments on your mortgage or car loan. Bankruptcy does not eliminate spousal or child support payments. Bankruptcy also won’t get rid of court fines or debts due to fraud. Other than these exceptions, when you complete your bankruptcy you are released from the legal obligation to repay unsecured debts that existed on the day you filed bankruptcy. Your debts are gone.
The point of bankruptcy is to give you a fresh start, free from overwhelming debt. That’s why bankruptcy deals with almost all unsecured debts. It’s a fair and consistent process for you and everyone you owe money to, and it eliminates your debts and gives you a fresh start.
Once you declare bankruptcy, your Licensed Insolvency Trustee will notify your creditors. While you provide an estimate of what you owe at the time of filing, it is up to your individual creditors to file a claim in your bankruptcy and to prove the amount owing. Any creditor with a provable claim will receive a pro-rata share of any money in your bankruptcy.
What happens to credit cards?
When you file bankruptcy, you are required to surrender any credit cards to your trustee. Don’t worry, we will tell you how you can manage things like online purchases, and you can apply for a new secured credit card to use while bankrupt.
You can eliminate credit card debt; however, you should not run up your balances right before claiming bankruptcy. Bankruptcy does not eliminate debts due to fraud. If in the ordinary course you went grocery shopping and paid for your weekly groceries on credit, that’s fine. But purchasing items with your credit card with the intention of not paying this debt could be viewed as a fraudulent transaction. This has two implications: The debt may remain after bankruptcy, and if you are filing a consumer proposal, your credit card company may vote against your proposal offer.
What happens to student loan debt?
Student loans are technically unsecured loans, but because they are loans guaranteed by the government, they aren’t treated the same way as any other personal loan.
You can discharge student loan debt through bankruptcy, but only if you left school (including both part-time and full-time) at least seven years ago.
In other words, you can’t declare bankruptcy immediately after graduation. The law requires you to make every reasonable effort to pay down your loans before you can ask for them to be discharged.
Can student loans be discharged early?
While the seven-year rule applies in the vast majority of cases, a bankruptcy court will consider discharging student loan debt early in extreme cases. You can apply to the court for discharge from student loans in five years.
To qualify for the hardship provision, you must prove that you tried to repay your loans and made use of the assistance programs available. You must also show that even those programs still left behind a severe hardship for you; for example, you can’t repay your student debt and buy food or pay rent.
Bankruptcy law can resolve tax debts
Dealing with the CRA can be stressful when you have unpaid income taxes, source deductions, or HST installments. They have strong collection powers and can act quickly to collect on unpaid taxes.
Bankruptcy law is federal legislation. As a result, both a bankruptcy and consumer proposal can successfully resolve outstanding tax debt.
It is important, however, to contact a Licensed Insolvency Trustee before CRA has placed any lien on your property.
How much debt do I need to file bankruptcy?
The minimum amount of debt required by law to file bankruptcy in Canada is $1,000; however, the true test is whether or not you are insolvent.
If you are unable to pay your debts as they come due, then bankruptcy is an option for you. Whether you should file involves weighing the pros and cons of bankruptcy, including eliminating your debts, with the cost of bankruptcy.
What Debts Are Not Discharged in Bankruptcy?
A non-dischargeable debt is any debt that cannot be included or resolved through bankruptcy. Unfortunately, bankruptcy does not clear all debts.
Some examples of debts not eliminated in a bankruptcy:
- Spousal or child support payments
- A debt arising out of fraud
- Any court-imposed fines and penalties including traffic and parking tickets
- Student loans if you have not been out of school for 7 years
- Restitution orders
- In some instances gambling debts
It’s also important to know that if you owe child support or alimony, then the recipient can submit a claim to your trustee to make themselves a “preferred creditor.” It will ensure that they get one of the first cheques from any funds in your bankruptcy.
Divorce debts are one of the primary causes of bankruptcy in Canada. If you are behind on support payments because of other unsecured debts, alleviating those debts through bankruptcy may help.
Mortgage & secured loans are excluded in bankruptcy
The approach to secured debt differs from unsecured debt. A secured debt is a loan that has an asset or collateral involved, a mortgage or car loan, for example.
Secured debts are an exception to debts you can discharge through bankruptcy.
Here is what you need to know about secured debts and bankruptcy:
First, no secured lender is permitted to cancel your loan based on a declaration of bankruptcy alone.
As long as you continue to make your monthly mortgage or car loan payment you can keep those assets. If you are current on your mortgage, you should also be able to renew your mortgage with your existing lender, although that decision is ultimately up to your lender.
If you are drowning in other types of debt, you may find filing bankruptcy helps improve your finances enough to be able to keep up with your monthly car and house payments.
Home equity is an asset in your bankruptcy. If you have a significant amount of equity in your home, then bankruptcy may not be the right solution to eliminate your debt. You may want to use that equity to consolidate or restructure your debts through a consumer proposal instead.
A consumer proposal is a way to keep your assets and still eliminate debt. Book a free consultation for a review of your debts and situation today.Get Help Now
What about joint debt or co-signed loans?
When you claim bankruptcy, it eliminates your obligation to repay the debt, but it does not clear someone who has co-signed or guaranteed a loan for you. Your creditor will still hold the joint debtor or cosigner responsible to make the remaining loan payments.
What can prevent your discharge?
By receiving your bankruptcy discharge papers, you are legally released from all debts covered under your bankruptcy. This means you are no longer liable for payments and you are legally protected from your creditors.
A creditor, the Superintendent of Bankruptcy, or your trustee can object to your discharge if you have not completed your required duties, your creditor questions your transactions before bankruptcy, or you committed an offence under the Act.
If your discharge is opposed, a court hearing in bankruptcy court will be held, and a bankruptcy judge or registrar will determine the conditions of your discharge. Those conditions may include a longer bankruptcy period, or you may be required to make additional payments.
The outcome of a court hearing could be an:
- Automatic discharge
- Absolute discharge
- Conditional discharge
- Suspended bankruptcy discharge
Common Debt Mistakes When Filing Bankruptcy
Bankruptcy is a legal process and your behaviour right before filing could impact the outcome.
Avoid these common mistakes debtors make when filing bankruptcy:
- Making large purchases on your credit card while planning on skipping out on the debt repayment. Debts due to fraud are not dischargeable in bankruptcy.
- Not filing your tax returns before filing. If you have a refund, you want to file your return and get your tax refund in your hands rather than having your refund become an asset in your bankruptcy. If you owe money, it’s best to file your returns to confirm your tax debt, and this will be required if you want CRA to vote positively in a consumer proposal.
- Preferring one creditor over another before bankruptcy. It is an offence under the Bankruptcy & Insolvency Act to pay off one creditor ahead of others. This holds true for family debt or any creditor. Your trustee is required to ask about possible preferential transactions. Your trustee might ask for the money back or another creditor might object to your discharge as a result of this payment.
- Thinking you can exclude a creditor. You are required to list all known debts on your Statement of Affairs. It is an offence to omit a creditor knowingly. Not only could this negatively affect your discharge, but it also doesn’t make financial sense. You are declaring bankruptcy to get a fresh start. Leaving yourself in debt after a bankruptcy is the opposite of what you are trying to achieve. If you honestly forget a creditor, notify your trustee right away. They can contact this creditor to participate in any dividends even after you file.
- Delaying your bankruptcy filing. Most people avoid bankruptcy for as long as possible. While that’s understandable, borrowing more money to make debt payments just piles on more debt you can’t repay. Don’t wait until you are missing payments and the debt collectors are calling.
- Worrying about your credit score. Many people wait too long to file because they worry about how bankruptcy will affect their credit score. It’s true, filing bankruptcy will appear on your credit report, but defaults and heavy debt loads will hurt your credit score too. The sooner you file, the sooner you can clean up your credit report and start to rebuild.
Get Rid of Unsecured Debt
When you can’t pay off your debts, it’s time to consider options. Declaring bankruptcy is just one solution to clear your debt problems.
It’s time to deal with the stress of overwhelming debts. Contact us today for a free debt assessment with a Licensed Insolvency Trustee to review the types of debt you are dealing with, your budget, and let us help you develop a debt elimination plan.
Hoyes Michalos & Associates provides personal bankruptcy services in the following locations
- Niagara Falls
- North York
- Ottawa West - Kanata
- St. Catharines
- Toronto Downtown
- Toronto Etobicoke
- Toronto Yonge & Bloor
- Personal Bankruptcy in Toronto
Other service areas
We offer the convenience of phone and video-conferencing only services for the following additional areas. Many people find it advantageous to begin the initial consultation and debt assessment over the phone or by video. If you decide to file, you can sign and complete your paperwork electronically. Credit counselling sessions can also be completed through video conferencing, which eliminates the need to miss work or schedule a time to attend the office.